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Business Entities

Business Entities provided by MacCormack Law in Boston, MA

There are a number of options available to provide you with asset and liability protection. Not everyone requires asset protection planning. The planning that is recommended will depend upon the assets you own and your potential exposure to liability.

Forming a Corporation

 A corporate form of business will protect personal assets from claims arising out of or relating to assets operated by the corporation. Corporations however are taxed both at the corporate level and also at the shareholder level. To avoid this double taxation, a corporation can make an election with the IRS to be taxed as an S corporation for federal and state income tax purposes. An S corporation will provide liability protection and flow through taxation (meaning the corporate income would be reported on the owner's personal income tax returns and not taxed at the corporate level).

Family Limited Partnerships

Family limited partnerships remain a popular entity for protecting assets from creditors, reducing estate taxes, and transferring ownership in closely held businesses to children and grandchildren. The typical family business would be structured so that the children set up an LLC to serve as the general partner (1% owner). The parents living trust would serve as the 99% limited partner. To fund a partnership, you would transfer assets to the partnership in exchange for general and limited partnership interests. So after the funding, the partners will own partnership interests rather than the underlying asset that was transferred. The limited partnership units are typically transferred to children, or to a trust for their benefit. By using a trust instead of direct gifts to children, claims against the limited partnership interests by the child's creditors and spouses are avoided. Case law supports the conclusion that a gift of limited partnership interests are valued substantially less than just an outright transfer of partnership assets. This would enable you to transfer assets to your children at a reduced value for gift tax reasons, which may ultimately result in significant estate tax savings.

Limited Liability Companies

The benefits of limited liability companies ("LLC") include flow through taxation, liability protection for managers and members, and flexibility in types of owners. Unlike corporations, LLC's do not need to hold annual meetings. With an LLC you can issue a profits interest to a key employee without any income tax consequences to the employee. A profits interest would entitle the employee to share in the profits of the LLC. With a corporate form of business, a taxable event occurs if you transfer stock to an employee.

Single member LLC's are attractive to some business owners because the IRS recognizes this form of business as a disregarded entity, meaning there is no requirement that the LLC file a tax return. The income and expenses of the LLC will be reported directly on the owner's personal income tax returns.

Delaware Series Limited Liability Company

This type of entity is very attractive to people that own multiple investment real estate properties. In order to separate the liabilities of one property from other properties, you would set up a separate entity for each property. The filing and tax compliance fees became very expensive. The Delaware series LLC offers a solution. You can establish one LLC and each parcel would be identified as a "separate series". The result is that the claims and obligations of one series shall not be enforceable against the assets of any other series or against the LLC generally. In other words, you would only create one LLC, but the effect is that each property would have liability protection as if it was titled in a separate LLC. To obtain this benefit, each property must be separately titled and separate books and records must be maintained.